Market Overview

Wal-Mart Entering Used Game Space; GameStop Under Pressure?

Wal-Mart Entering Used Game Space; GameStop Under Pressure?

Wal-Mart (NYSE: WMT) on Tuesday announced that it will launch a used video game exchange program. Customers will be able to trade in old video games in exchange for store credit beginning on March 26.

Wal-Mart's move into the used game space places tremendous pressure on GameStop (NYSE: GME) whose trade-in program is the company's bread and butter. GameStop holds a dominant position in the nearly $2 billion pre-owned video game market, which consists of an estimated 110 million people across the United States.

GameStop reported that its pre-owned sales rose seven percent to $567 million during the 2013 holiday season. The pre-owned category is expected to yield a 46 percent to 49 percent gross margin rate for the company.

“When we disrupt markets and compete, our customer wins. They'll save money on video games and have the flexibility to spend it however they want,” Wal-Mart said in a statement on Tuesday morning.

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Wal-Mart was already active in the tablet and smartphone trade-in program and is “actively taking aim at the $2 billion pre-owned video game opportunity” by offering consumers the ability to purchase any item in its store and not limit consumers to purchasing a new game.

If gamers are interested in trading in used games for clothes or other Wal-Mart products, GameStop could feel some pressure.

Colin Sebastian, analyst at Baird isn't concerned. The analyst sees the news as being a “headline risk” for GameStop that will pressure shares, but aside from that Wal-Mart is unlikely to capture meaningful share of the used game market.

Sebastian noted that other names such as Best Buy and have previously toyed with a pre-owned game exchange program and has only seen “modest success.”

In fact, Wal-Mart was previously active in the pre-owned game market and introduced kiosks in 2009 that customers could use to trade in their old games. The program failed and was discontinued in 2010.

Latest Ratings for WMT

Nov 2020Morgan StanleyMaintainsOverweight
Nov 2020Raymond JamesMaintainsOutperform
Nov 2020Deutsche BankMaintainsBuy

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